Exit Sir Ron, scourge of lazy boards

Ron Brierley, the legendary value investor who for 30 years was the nemesis of boards of directors of poor performing Australian and New Zealand companies, pulled up stumps on Friday in a move that marks the end of a peculiar and colourful type of shareholder activism.

Brierley
’s modus operandi of stealthy corporate raids or proxy fights against companies with complex structures, complacent management or poorly understood asset values has been replaced with a more sedate and somewhat boring form of shareholder activism.

Only a handful of the fund managers managing Australia’s $1.2 trillion pool of superannuation savings are willing to take the high profile and somewhat blunt approach adopted by Brierley in his heyday.

Many funds outsource their decision making about critical corporate governance issues to proxy advisory firms such as ISS or CGI Glass Lewis. While several big fund managers employ specialist corporate governance staff to advise on shareholder resolutions at annual meetings, few big investors are on the front foot actively driving an activist agenda.

A handful of relatively high profile fund managers have been willing to shout from the sidelines about issues that gain headlines such as excessive remuneration, but it is rare to see the sort of in-your-face approach of Brierley.

However, there are indications that the aggressive shareholder activism pioneered by Brierley in Australia is getting up a head of steam in the United Kingdom and the United States. Specialist hedge funds such as the Children’s Investment Fund in London and fund managers such as Hermes Fund Managers and Governance for Owners are using their voting rights to force changes at companies with structural or strategic governance problems.

Big US and UK companies have been put on notice that they cannot ignore shareholders. It is believed Governance for Owners is researching the possibility of offering its UK funds in Australia.

It is ironic that Brierley’s departure from the corporate scene is because of the activism of a group of fund managers in New Zealand, who accused his company, Guinness Peat Group, of having poor corporate governance structures, lack of accountability to shareholders and failing over several years to unlock the value inherent in its share portfolio.

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Company Profile

Although
GPG
has delivered returns to shareholders over a 15-year period of 16 per cent compound, since the global financial crisis its stock has traded at a 30 per cent discount to net assets.

The New Zealand fund managers successfully overturned a plan put forward in the middle of last year by the GPG board and management to hold on to the Australian share portfolio and make best efforts to sell its industrial threads business Coats, which has total assets of about $1.5 billion.

The fund managers forced Brierley and his fellow directors to appoint a new independent chairman, former Macquarie banker Mark Johnson, and three other independent directors, Mike Allen, Gavin Walker and Rob Campbell.

Existing directors Blake Nixon and
Gary Weiss
remained on the board but were sidelined by the new directors. Weiss remains chairman of Coats.

A longstanding New Zealand director of GPG, Tony Gibbs, got on side with the New Zealand fund managers before resigning suddenly in June last year. He appeared to change tack just as the negative publicity about Brierley and GPG reached a fever pitch in a country with few corporate heroes.

One of the major shareholders who agitated to get GPG to liquidate its portfolio was Guy Elliffe, head of equities at AMP Capital Investors in Wellington, New Zealand.

“I think this is a good case where the board and management of the company have listened to their shareholders and responded accordingly," he says.

The liquidation of GPG’s entire $978 million portfolio of shares in a range of companies in Australia, New Zealand and the UK could trigger some interesting corporate plays because of the range of strategic stakes.

Some of the Australian companies in the GPG portfolio and the GPG shareholding stakes are: Rattoon Holdings 44.8 per cent, Capral 44.4 per cent, Tandou 24.95 per cent, Ridley Corporation 20.9 per cent, NSX 13.3 per cent, Farm Pride Foods 13.2 per cent, Capilano Honey 9.4 per cent, AV Jennings 7.9 per cent and PrimeAg Australia 5.3 per cent.

The company will have up to two years to sell the stakes, which is meant to avoid a fire sale.

Brierley stepped down as chairman of GPG in December last year and has not been heard of much since.

Those close to the company say he has been in semi-retirement for some time and unwilling to pull the trigger on deals put to him following detailed analysis by GPG’s astute investment staff in Sydney.

Brierley’s legacy will be tarnished by the manner of his departure from the corporate scene and the fact that the new directors of the firm could not find room in Friday’s announcement to even mention his name.

Instead the independent directors provided a list of all that was wrong with GPG.

They said its primary problem was that it had become “a large, complex and geographically diverse portfolio of assets, including a mix of minority shareholdings and wholly owned businesses (including Coats)".

They said it suffered from a “lack of value transparency with a number of unlisted investments", the largest of which is Coats.

They recognised that it had delivered a “disappointing performance in recent years" and that it was carrying a “number of actual and contingent liabilities, including capital notes, pension liabilities and potential payment of a European Commission fine,"

Brierley’s name and that of GPG’s antecedent, Industrial Equity Ltd, are associated with some of the most memorable corporate plays in Australia. Along the way he and his right hand man, Weiss, unlocked enormous amounts of value hidden or sleeping inside companies that were managed without much thought for shareholders.

Some of the more high-profile companies to have been transformed under the control of Brierley or been the subject of richly rewarding raids by IEL or GPG include Woolworths, AGL, Allied Mills, Tyndall Australia, Tower Australia and Premier Investments.

One of the features of those investments was the willingness of Brierley to make a profit and move on. Even to this day, the company’s best brains wish they had never sold Woolworths, which was listed in 1993 at $2.45 billion and is now worth $31.8 billion.

Brierley brought a fundamental principle to his investment activity that has been lost in these days of gobbledygook about alpha and beta.

His basic rule was that the fund manager was there to get absolute value for shareholders and not simply to beat an index. These days Australian fund managers can collect big bonuses for delivering negative returns just because those returns are not as negative as the index.

Brierley liked his perks but he was willing to forgo a salary. IEL had a corporate jet and a boat called Lionheart, but the primary returns for Brierley were from appreciation in the company’s share price.

While many fund managers these days are forced to take shares in their listed parent company as part of their remuneration, they also earn seven-figure salaries and seven-figure bonuses.

Instead of huge financial bonuses, Brierley preferred to take his benefits in kind. GPG and IEL paid for a suite a rooms at the Sheraton Park Tower Hotel in Knightsbridge, London. He was staying there on Thursday when the GPG board met in London.

However, the company stopped paying the bills at the Sheraton Park Tower once he stepped down as chairman of GPG last year.

In hindsight, the biggest single investment problem at GPG has been Coats, which was found by Nixon but left to Weiss to clean up.

Weiss knew little about the world of industrial threads when he was forced to step in and rescue Coats from imploding. But he succeeded in restructuring the business including updating its capital equipment, slashing costs, improving its sales and marketing arm and restoring profit margins.

When Coats reports its latest financial results in about two weeks, analysts expect it to show a strong rebound in profitability.

Weiss had planned to sell Coats through an initial public offering in 2008 but that plan had to be ditched because of the global financial crisis. It is likely that once the GPG share portfolio has been liquidated that an investment in GPG will become a pure play exposure to Coats.

Nevertheless, the independent directors of GPG said they would continue to evaluate opportunities for “value optimisation", which means sell the business in a trade sale or sell it through an initial public offering.

The departure of Brierley from the corporate scene will leave the job of ensuring boards perform and deliver value to shareholders to an amorphous group of largely anonymous fund managers.

They utilise a new style of activism that involves discussions behind closed doors and it is not quite clear when they are having an impact.

Proxy advisory groups such as ISS and CGI Glass Lewis are becoming very influential. They are providing an opportunity for fund managers who don’t want to stand up at annual meetings or speak publicly about important issues such as excessive remuneration to stay behind the scenes.

It is understandable that fund managers being paid millions of dollars want to stay in the background when controversial remuneration reports come up for voting.

That is not to say that proxy advisory groups do not serve a valuable service. They can be a focal point for galvinising shareholders and used as a sounding board for boards trying to find out the views of the investment community.

Perhaps we just have to accept the fact that the clever, public, hard-edged approach to shareholder activism used so successfully by Brierley is a thing of the past and not suited to an age when just about everything can be outsourced.